But You Only Have Enough Money for a Crowdfunder
If Warren Buffet is the Oracle of Omaha then Mark Cuban’s legions follow the Diviner of Dallas. Last year this sage prognosticated in his blog about a bubble he saw on the horizon, that of equity crowdfunding. Forbes posed the question of the crowdfunding bubble back in 2012 and both the buzz and the nay-saying hasn’t stopped since. Since regulations were recently loosened up in the United States to enable more people to enter the game of equity crowdfunding, let’s look at this funding fad a little closer.
Forbes magazine predicts that in 2016 we will see crowdfunding overtake traditional VC funding. Now, there are several types of crowdfunding, from your friend trying to get donations for their trip to Europe (we all know that person…) to reward based crowdfunding (theoretically step up to be one of the first to invest and end up one of the first to have “the next big thing”), to equity crowdfunding, where you buy equity in the fledgling company.
While the risk is different with each one, the sage advice is to consider each one as much a donation as your friend’s fun fund. If the reward crowdfunding lads abscond with your money and you never get your supersonic drone, tough tatas. And if that company you have “equity” in finds itself like nine out of ten startups, well, that’s what we call in Texas up poo creek without a paddle.
Let’s paint the rosy picture for a second, though. There are good ideas out there that need capital that is difficult to come by through traditional channels if they are just getting started. Banks and investors can be quite picky about seeing documented growth and promise and that can’t exactly happen without money. Murphy’s law: In order to get a loan, you must first prove you don’t need one. And in this case, there is something to be said for having the ability to turn to a crowdfunding platform and your friend’s friend’s friend for help.
As with almost anything in life, there is a range of options out there of varying quality, and crowdfunding platforms are no different. It is imperative to do research and know what requirements, if any, a platform has for participation. Some do a better job than others at weeding out the fraudsters and deluded. It’s also imperative to make sure investments come with pre-emptive rights, meaning your 1% share isn’t suddenly diluted to .0001% somewhere down the funding road.
There is one or two success stories out there, as with E-Car Club, which was acquired after only a few years and paid out nice returns to investors. However, most companies that need your crowdfunding are not just companies considered sub-prime by banks or investors, they are early stage startups, meaning that if they do conquer all odds and make it, chances are still good that it won’t be for 5-10 years.
So knowing that, at best, you’ve got a 1 in 10 chance that in a decade you’ll get a return, as I advised earlier, consider your funding a donation. My mother, another Diviner of Dallas, always said “don’t loan money you can’t live without.” What equity crowdfunding has done that is both exciting and dangerous is give us all the chance to invest.
And this is what Mark Cuban points to as the real problem. Your Average Joe can now throw $1000 or more into a company and feel he’s made an investment. Not only is that mortgage money for Mr. Joe, that’s money that can literally just evaporate as it did with Rebus Group recently. £800,000 pounds raised in equity crowdfunding just disappeared overnight as the company folded.
It’s not like a publicly traded company that has liquidity. When my Crapital One and Shiti Bank stock tanked in the aftermath of 2008, I may have theoretically lost a bit of dinero, but they were still worth a few measly bucks a share. And when they bounced back a little and I needed some cash I could sell them on the spot, unlike crowdsourced equity. When you’re in, you’re in.
It may be a bit elitist, but Mark Cuban isn’t totally wrong to worry that many of us 99%ers will now be tempted to think we too are “angel investors” and that we have found the next Uber to invest in. Between the high fees they charge to participating companies and the buzzy temptation of returns to those Cuban refers to as “widows and orphans”, it’s hard not to envision a payday loan place with its flashing neon dollar sign.
If you see that company you really believe in, like the next electric car, you dirty hippie, and have the money to put in, by all means go for it. But if that’s really your mortgage money or you owe Amex a dime, best to cool your heels, cowboy, and buy a savings bond. You might even stay ahead of inflation.